Ever since the days when the Tudors ran the country, governments have used a
tax on property – either residential or commercial – to pay for local
services.

And doubtless, ever since Queen Elizabeth I was on the throne and Sir John Fortescue ran the Exchequer, shopkeepers have complained about the impact of the levy. But it’s hard to believe their protests have ever been more heartfelt than in this second Elizabethan Age.

When Her Majesty’s Chancellor delivers the Budget in March, there is one thing, above all, the retail industry wants to see: a freeze on business rates. Given all that has happened on the high street since Mr Osborne’s last Budget – the collapse of HMV, Jessops, Blockbuster, Comet and JJB Sports – that shows just how important retailers consider the issue.

It is not just the scale of the tax that upsets everyone from the humblest local shopkeeper to the loftiest chief executive, but how it is calculated and the imbalance this is threatening to cause. At a time when online sales are rising sharply and traditional retailers are collapsing, business rates are a tax on the high street.

According to the British Retail Consortium, the retail industry pays more than £7bn in business rates – equivalent to 28pc of the total funds the Government raises from the levy.

Last year, an inflation-linked increase in business rates added £350m to retailers’ bills and, despite the challenging conditions on the high street, a further £175m increase is scheduled for April.

So, when the Government talks about creating the most competitive tax system in the G20 by cutting corporation tax, it frustrates retailers. After all, the cut in corporation tax to 21pc is being partly funded by increasing business rates.

In truth, when a political row raged last year about how little corporation tax Amazon paid, many retail chief executives simply shrugged their shoulders. The biggest imbalance between Amazon and the high street is not corporation tax, but business rates.

One leading high street rival of Amazon last year paid £120m in business rates, three times the amount it paid in corporation tax and more than its annual profits.

The contrast is stark. Amazon pays no business rates on its rapidly growing sales because it has no high street properties. However, the high street retailer is seeing its profits fall but paying more in business rates.

“Where is the balance?” asks one retail chief executive. “At the end of the day, hammering retailers for millions every year is not going to help.”

Given that the Coalition has pledged to protect the high street – commissioning Mary Portas to launch so-called Portas Pilot towns – increasing business rates on shops appears a clear contradiction.

Business rates are not a new phenomenon. A tax on commercial property can be traced back to the Elizabethan Poor Law of 1572. However, the modern form of business rates has its roots in the General Rate Act of 1967, subsequently replaced by the Local Government Finance Act 1988, which split properties into domestic and non-domestic and created the hugely controversial Poll Tax.

In 21st century Britain, business rates are the commercial equivalent of council tax and account for 5pc of the country’s tax take. They are calculated by the rental value of the commercial property and the annual rate of inflation. Every five years, the Valuation Office Agency calculates the rateable value of Britain’s properties – roughly equivalent to its annual rent – and determines a “multiplier” of what proportion of that value will be paid in business rates.

The revaluations are designed to redistribute the business rates burden in line with the shape of the economy and should not affect the overall tax take. However, business rates are also subject to an annual inflation-linked increase based on Retail Prices Index (RPI) from the previous September.

For the 2013-14 tax year, business rates are set for a 2.6pc increase with the provisional “multiplier” set at 47.1p. This means that the tax will be equal to almost half the annual rent of a property.

For the Budget, retailers are focusing their attention on this annual inflation increase. The British Retail Consortium has asked for the 2013 rise to be frozen and, in future, for the increase to be based on the annual average of Consumer Price Index (CPI) rather than a single month’s RPI.

“The inflation-linked system used to calculate the annual increase in rates feels particularly unfair in today’s multi-channel retail world,” says Michael Sharp, chief executive of Debenhams. “While online is taking an increasing share of sales, rates bills on the high street continue to increase, which inevitably affects the profitability of stores.”

The chief executive of Kingfisher, Ian Cheshire, adds: “At a time when property rates are leading to higher levels of shop vacancies, now is the time to halt persistent increases in rates.”

In the longer term, however, there may need to be a more fundamental restructuring of business rates. The tax operates on the basic premise that the physical size of a business is linked to the size of its profits, but the rise of the internet and ecommerce businesses challenges this. The battle for customers is now in cyberspace as much as on the high street.

For companies such as Jessops, Blockbuster and HMV, business rates were a major burden. Their rates bill was rising despite sales being lost to online rivals that simply did not have to deal with business rates.

A fall in the rateable value of retail properties that reflects the unique modern pressures on the high street could reduce business rates on shops. However, the Government has postponed the revaluation scheduled for 2013 until 2015. This has exacerbated anger over the tax. It means that retailers will have to pay business rates based on peak property rents in 2008 for another four years.

The Coalition has said the revaluation would cause instability for businesses and warned it would not help retailers anyway because the rental value of properties has fallen across the UK since the financial crisis, with the most pronounced declines in City of London offices.

However, the postponement has strengthened opposition to the tax.

The property and retail industries have opposite views on many issues, but they are united on business rates.

Liz Peace, chief executive of the British Property Federation, said: “Why should the tax system exaggerate the existing cost base and flexibility advantages of an internet retailer over a high street retailer? Particularly given the urgent importance of encouraging investment on the ground in the built environment and UK jobs.”

With Britain losing its AAA credit rating, George Osborne has plenty to think about ahead of the Budget. Retailers’ concerns may not be uppermost in his mind. However, if the Government is serious about protecting the high street, it has to allow shops to battle the internet on a level playing-field and re-examine business rates.